LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE 2014

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1 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE 2014

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3 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE 2014

4 Published by the Climate Change Authority This work is licensed under the Creative Commons Attribution 3.0 Australia Licence. To view a copy of this license, visit licenses/by/3.0/au. The Climate Change Authority asserts the right to be recognised as author of the original material in the following manner: or Commonwealth of Australia (Climate Change Authority) 2014 IMPORTANT NOTICE PLEASE READ This document is produced for general information only and does not represent a statement of the policy of the Commonwealth of Australia. The Commonwealth of Australia and all persons acting for the Commonwealth preparing this report accept no liability for the accuracy of or inferences from the material contained in this publication, or for any action as a result of any person s or group s interpretations, deductions, conclusions or actions in relying on this material.

5 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE SUMMARY Australia has an opportunity to reduce greenhouse gas emissions and lower fuel bills for Australian motorists by making light vehicles more efficient. A light vehicle emissions standard is the best way to achieve this. Reducing emissions from all light vehicles (including both passenger and light commercial vehicles) would support Australia s contribution to global efforts to limit the harmful impacts of climate change. Transport accounts for 16 per cent of Australia s greenhouse gas emissions and light vehicles alone account for 10 per cent. Phase one of the proposed standard ( ) is projected to avoid 59 million tonnes of emissions over the period to 2030, roughly equal to the current annual emissions of all light vehicles. Australians would benefit if light vehicles used less fuel and emitted fewer greenhouse gases. Technologies to reduce fuel use and associated emissions are readily available and are relatively inexpensive. Improving light vehicle efficiency is one of the lowest cost emissions reduction opportunities in the Australian economy. Australia lags behind many other countries in light vehicle efficiency. While the efficiency of Australia s light vehicle fleet is improving over time, more can be done. The Authority s analysis, drawing on international experience and principles of good policy design, shows mandatory standards are a cost-effective policy for reducing light vehicle emissions. A mandatory standard is likely to complement the Emissions Reduction Fund and existing arrangements in the Australian transport sector. An emissions standard for all new light vehicles sold in Australia from 2018 would deliver clear benefits. A standard that is achievable and would deliver significant benefits to Australia and Australian motorists could: set a target to reduce the emissions intensity of the Australian light vehicle fleet from its current level of 192 grams of carbon dioxide per kilometre (g CO 2 /km) to 105 g CO 2 /km in 2025 oblige suppliers of new light vehicles to provide more efficient vehicles to the Australian market over time build on existing arrangements to minimise any new regulatory burden. The benefits of a light vehicle emissions standard substantially outweigh the costs at both private and national levels. A 105 g CO 2 /km target could increase the average cost of a new car in 2025 by about $1,500, but this would be more than offset by fuel savings of $830 in the first year and $8,500 over the life of the vehicle, leaving motorists better off. A standard would also prevent emissions and save Australia $580 for each tonne of CO 2 avoided (Figure 1). Of the standards examined by the Authority, the strongest standard delivered the largest net benefits. FIGURE 1: BENEFITS OF A LIGHT VEHICLE EMISSIONS STANDARD g CO 2 /km $ CO g CO 2 /km $830 annual fuel saving for motorists for a new car in Mt CO 2 -e emissions prevented by 2030 $580 net benefit to Australia for each tonne of CO 2 -e prevented Source: Climate Change Authority

6 6 SUMMARY FIGURE 2: EMISSIONS INTENSITY OF NEW LIGHT VEHICLES IN AUSTRALIA UNDER A STRONG STANDARD COMPARED WITH US AND EU TARGETS Australia: BAU, all light vehicles Australia: strong standard, all light vehicles US: all light vehicles EU: passenger vehicles including SUVs Average emissions intensity (g CO 2 /km) Note: See Chapter 4 for information about this chart. BAU is business as usual. SUV is sports utility vehicle. Source: Climate Change Authority using Reedman and Graham 2013b, ICCT 2014 and EC 2014 Early adoption of a standard maximises the benefits, because it takes time for changes to new vehicles to improve the fleet as a whole. Of the standards examined by the Authority, a standard starting in 2018 and reaching 105 g CO 2 /km by 2025 generates the greatest emissions reductions and financial benefits for Australian motorists. It is broadly aligned with the targets introduced in the United States and trails the stronger European Union targets (Figure 2). The Authority believes it is a sensible first step in improving Australia s light vehicle fleet. Light vehicle emissions standards should be designed to promote environmental goals, policy stability and equity, and minimise regulatory burden. This suggests the following features: Coverage of new passenger and light commercial vehicles under a single light vehicles standard. Commencement in 2018, with annual obligations defined to Australian vehicle manufacturers have announced that they will cease local operations by 2018, and would therefore be unaffected by a light vehicle emissions standard commencing in An obligation to comply with the standard on all suppliers of new light vehicles to the Australian market who sell more than 2,500 vehicles each year, with financial penalties for failure to comply. Flexible compliance mechanisms, including a fleet averaging approach with banking and limited borrowing allowed during the first phase. Adoption of the existing emissions test under the Australian Design Rules for motor vehicles. A review in 2021 to consider the operation and design of the scheme and recommend new national average targets for phase two, after 2025.

7 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE CONTENTS 1 Introduction The Authority and vehicle emissions standards Previous work on light vehicle emissions standards An emissions standard for light vehicles in Australia Structure of this report 14 2 Opportunities to reduce light vehicle emissions in Australia Australia s transport emissions Opportunities for reducing transport emissions Characteristics of Australia s light vehicle fleet and its use Opportunities to improve emissions intensity of the light vehicle fleet Current policies affecting light vehicles 26 3 Policies for reducing light vehicle emissions Standards and the government s deregulation agenda Why is a policy response necessary? Market failures and barriers to improving vehicle efficiency Policies to improve light vehicle efficiency Interaction of standards with the Emissions Reduction Fund Conclusions on policies for reducing vehicle emissions intensity 39 4 Light vehicle emissions standards setting the right target How would an emissions standard work? Choosing the right level for standards The Authority s approach to the costs and benefits of standards Net benefits of standards for motorists Social benefits of standards Conclusion the target level of an Australian standard 53 5 Designing an emissions standard for Australia Framework for design of an Australian standard Scheme design choices Scheme review 58 6 Implementation 61 Appendices A International implementation of vehicle emissions standards 63 B Modelling and approach to costs and benefits of standards 71 C Design choices 81 List of boxes, figures and tables 95 References 97 Glossary 101 Abbreviations and acronyms 103

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9 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE ACKNOWLEDGEMENTS The Authority would like to thank the many people and organisations who contributed time and expertise to the preparation of this report. These contributions have enhanced the quality of the work. Several government departments and public agencies have contributed to the Authority s work, including the Department of the Environment, Department of Industry, Department of Infrastructure and Regional Development, National Transport Commission and Office of Best Practice Regulation. The Authority consulted widely with industry and non-government stakeholders, and is grateful for the feedback provided by the Australian Automobile Association, ClimateWorks Australia, the Federal Chamber of Automotive Industries (FCAI), Future Climate Australia, the National Roads and Motoring Association (NRMA), and the Australian Industry Group. The Authority is particularly grateful for expert review from the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the International Council on Clean Transportation (ICCT).

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11 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE INTRODUCTION 1.1 THE AUTHORITY AND VEHICLE EMISSIONS STANDARDS The Climate Change Authority is an independent statutory agency, established to provide expert advice on Australian climate change policy. 1 The Authority s work is guided by a set of principles under the Climate Change Authority Act 2011 (Cth). The principles require that measures responding to climate change should be economically efficient, environmentally effective, equitable and in the public interest. These principles have guided the Authority s analysis of vehicle emissions and underpin this report. In its February 2014 report, Reducing Australia s Greenhouse Gas Emissions Targets and Progress Review, the Authority examined opportunities to reduce Australia s emissions and help achieve its emissions reduction goals. Australia s emissions reductions contribute to the global goal of limiting warming to less than 2 degrees Celsius compared to pre-industrial levels. The Authority noted that the transport sector is a significant and growing source of emissions; it currently accounts for 16 per cent of Australia s emissions and light vehicles alone account for 10 per cent. The Authority identified a variety of low-cost opportunities to reduce emissions in the sector; in particular recommending: The government investigate the near-term introduction of fleet-average CO 2 emissions standards for light vehicles in Australia as a way to secure significant, cost-effective emissions reductions and related co-benefits (CCA 2014a, p 166). This report provides further analysis of light vehicle emissions standards, which demonstrates that standards are a cost-effective way to reduce Australia s greenhouse gas emissions and light vehicle fuel use. Standards should be designed to maximise benefits and minimise costs; if introduced soon, standards could improve the efficiency of almost half of the Australian fleet by PREVIOUS WORK ON LIGHT VEHICLE EMISSIONS STANDARDS While there have been significant improvements to the emissions intensity of Australian light vehicles, the fleet remains among the least efficient in the world. A significant body of evidence and international experience shows that Australia could benefit from mandatory light vehicle emissions standards. Light vehicle fuel efficiency and greenhouse gas emissions have long been discussed in Australia. Voluntary fuel consumption targets for passenger vehicles were first raised in Targets have accompanied fuel efficiency improvements, with fuel consumption targets per 100 kilometres dropping from 9.5 litres by 1983 to 6.8 litres by 2010 (PC 2005, p. 245). In 2005, the industry adopted a voluntary target to reduce average emissions for all new light vehicles from 245 to 222 g CO 2 /km by 2010 (FCAI 2008). This target was achieved two years early and not extended. In July 2009, the comprehensive 10-year National Strategy on Energy Efficiency from the Council of Australian Governments (COAG) included measures to accelerate energy efficiency improvements and deliver cost-effective energy efficiency gains across all sectors of the

12 12 CHAPTER 1 Australian economy. A key element of the strategy for the transport sector was to assess the costs and benefits of introducing CO 2 emission standards for light vehicles (COAG 2009, p. 20). In 2010, the Task Group on Energy Efficiency recommended that the government consider the introduction of a mandatory CO 2 standard for light vehicles (2010, p. 4). In 2011, the Department of Infrastructure and Transport released a discussion paper seeking views on the most appropriate regulatory framework and target for an emissions standard (DIT 2011a). Stakeholders, including the Australian car manufacturing sector, expressed a range of views. 1 There is a significant and growing body of evidence from Australia and around the world that there are substantial low-cost emissions reduction opportunities from light vehicle efficiency technologies, and that light vehicle emissions standards have successfully encouraged greater penetration of those technologies in the market. 1.3 AN EMISSIONS STANDARD FOR LIGHT VEHICLES IN AUSTRALIA A fleet-average light vehicle emissions standard would set a national average target for new vehicles sold in Australia. Vehicle suppliers would have specific obligations, designed to ensure the national average target is met. Over time, a standard would contribute to emissions reductions as more vehicles in the fleet become more efficient. The standard would have costs, primarily a modest increase in the price of new light vehicles. These costs would be clearly outweighed by benefits, including reduced greenhouse gas emissions, lower fuel costs for motorists and improved energy security for Australia. The Authority has assessed the range of options available to policy makers in designing a light vehicle emissions standard, and identified an effective and least-cost model (see Figure 1.1) that would deliver net benefits with a low regulatory burden. Most recently, ClimateWorks (2014) found that improving the fuel efficiency of Australia s light vehicle fleet could deliver substantial environmental and economic benefits. These included cumulative financial savings to vehicle owners of $7.9 billion across the economy within 10 years. 2 The CSIRO (2012) found that the largest emissions reductions available in Australia s transport sector are from more efficient fuel use in light vehicles. The International Energy Agency (IEA) strongly encourages governments to implement policies that include light vehicle emissions standards because they have proven to be effective in mobilising the large, low-cost opportunity available in light vehicle efficiency technologies (IEA 2012a). 1 The paper and submissions are available at 2 ClimateWorks estimate is based on a standard introduced by 2016, with a target of 130 g CO 2 /km in 2020 and 95 g CO 2 /km in BOX 1: IMPORTANT TERMS IN THIS REPORT Light vehicles all road vehicles under 3.5 tonnes gross vehicle mass, including passenger vehicles, sports utility vehicles (SUVs) and light commercial vehicles, but excluding motorcycles. Vehicle fuel efficiency the amount of fuel consumed by a vehicle over a given driving distance; for example, litres per kilometre (L/km). Emissions intensity the amount of greenhouse gases emitted by a vehicle over a given driving distance; for example, grams of carbon dioxide per kilometre (g CO 2 /km). There is a direct relationship between fuel efficiency and emissions intensity for any given fuel. Different fuels have different emissions intensities.

13 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE FIGURE 1.1: THE PROPOSED LIGHT VEHICLE EMISSIONS STANDARD National average targets in each year become stronger over time Cars of all sizes can meet the limit curve, which is derived from the national average target Large car Emissions intensity (g CO 2 /km) Emissions intensity (g CO 2 /km) Limit curve Medium car SUV National average target Vehicle footprint (m 2 ) A supplier can sell cars above the curve, so long as the average emissions intensity of its sold vehicles meets the limit curve The limit curve changes each year to meet the national average target Limit curve Emissions intensity (g CO 2 /km) Limit curve Inefficient medium car Efficient SUV Emissions intensity (g CO 2 /km) Vehicle footprint (m 2 ) Vehicle footprint (m 2 ) Source: Climate Change Authority The government would set a national average target for emissions intensity of the new light vehicle fleet in Australia in each year. The target would be expressed in grams of carbon dioxide emitted per kilometre (g CO 2 /km). The target would relate to the average emissions intensity of the Australian fleet not individual vehicles. The government would translate the national average target into an attribute-based limit curve based on the Australian fleet mix. It would use a mathematical relationship between the size (footprint) of vehicles and their emissions intensity to set a limit on the average emissions intensity of the fleet. Larger cars would be permitted somewhat more emissions than smaller cars under the standard, reflecting the reality that larger cars can be more emissions-intensive. The footprint approach recognises the different consumer utility of different vehicles. Each supplier of new light vehicles to the Australian market would use the limit curve to determine the mix of vehicles it supplies to the market each year. A supplier could sell vehicles above the limit curve provided they are offset by sufficient sales of vehicles under the limit curve. A supplier could improve the efficiency of all vehicles in its fleet or sell more highly efficient vehicles to offset its less efficient vehicles. This imposes a more equitable burden across suppliers that specialise in different market segments. The standard would take effect in 2018, with annual limit curves defined to This gives the light vehicle sector time to prepare for the scheme and a clear pathway for improvement. Each supplier would have an obligation to comply with the limit curve, with penalties for non-compliance. A supplier could bank or borrow credits for compliance from one year to use in another year.

14 14 CHAPTER STRUCTURE OF THIS REPORT This report builds on previous Australian and international work, which has established a clear case for a light vehicle emissions standard in Australia and generated public discussion about the design of such a policy. This report: identifies opportunities to reduce transport emissions, particularly from light vehicles identifies policy options and makes a case for regulation describes the likely costs and benefits of a light vehicle emissions standard in Australia identifies the important policy design choices in making a standard makes findings about arrangements that would maximise the benefits of a standard while minimising the costs of regulation. The report is structured as follows: Chapter 2 sets out trends in light vehicle emissions in Australia and identifies significant opportunities for reducing those emissions Chapter 3 examines the case for regulation and compares mandatory light vehicle emissions standards against other policy alternatives Chapter 4 identifies the appropriate national average target, taking account of public and private costs and benefits Chapter 5 outlines the preferred design of a standard to maximise the benefits and minimise the costs of the scheme Chapter 6 identifies a small number of issues requiring further research.

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17 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE OPPORTUNITIES TO REDUCE LIGHT VEHICLE EMISSIONS IN AUSTRALIA The transport sector accounts for 16 per cent of Australia s greenhouse gas emissions. Light vehicles account for the largest share 10 per cent of Australia s total emissions. The Australian light vehicle fleet has become more efficient and less emissions-intensive over time but large opportunities for further improvements remain. Technologies to improve light vehicle efficiency are readily available and represent one of the lowest cost emissions reductions opportunities in the Australian economy. 2.1 AUSTRALIA S TRANSPORT EMISSIONS The transport sector spans four modes road, rail, aviation and shipping. Greenhouse gas emissions from transport come primarily from fossil fuels combusted in vehicles. The domestic transport sector contributed 90 Mt CO 2 -e, or 16 per cent of Australia s greenhouse gas emissions in 2012 (DoE 2014a, p. 2) (Figure 2.1). Australia s per capita transport emissions are higher than those of most other countries (IEA 2013a, p. 104). This is partly because we use more road transport and partly because our road passenger transport is relatively inefficient. FIGURE 2.1: AUSTRALIA S TRANSPORT EMISSIONS BY MODE, 2012 Rail: 3 Aviation: 8 Australia s emissions Transport emissions: 90 (Mt CO 2 -e in 2012) 16% Light vehicles: 57 Trucks: 18 Buses and motorcycles: 2 Shipping: 3 Source: DoE 2014a; Treasury and DIICCSRTE 2013 Note: Figures do not add due to rounding.

18 18 CHAPTER 2 Transport emissions increased by 50 per cent between 1990 and 2012, the fastest sectoral growth over the period (DoE 2014a, p. 2). Emissions increased because growth in transport activity outpaced improvements in fuel efficiency. While per person ownership and use of light passenger vehicles has stabilised after decades of growth, freight and aviation activity continues to grow. These trends are reflected in stable automotive petrol consumption and strong increases in diesel and aviation turbine fuel consumption over the past five years (22 and 28 per cent respectively) (DoE 2014b, p. 11). With no further policy action, overall transport emissions are projected to increase in the period to 2030, as demand growth continues to outpace efficiency improvements. Figure 2.2 shows historical and projected trends of Australia s transport emissions, by mode of transport. The projected growth is in the absence of a carbon price and without any further policy action. In this graph, and throughout this report, transport emissions refer to the tailpipe emissions from vehicles. Emissions from generation of electricity used by electric vehicles are accounted for in the electricity sector. Combustion of biofuels produces zero emissions for transport accounting purposes, but biofuel production emissions can be substantial and are included in the agriculture or industry sectors. Both of these issues are discussed further below. Key trends include: Road transport is the dominant source of transport emissions, contributing 85 per cent of all transport emissions in 2012 (77 Mt CO 2 -e). This includes motorcycles, cars and light commercial vehicles, rigid and articulated trucks and buses (CCA 2014a, p. 274). Light vehicles are the largest contributor, emitting 57 Mt CO 2 -e in 2012 almost two-thirds of transport emissions and 10 per cent of Australia s total emissions (CCA 2014a, p. 274). Growth in road passenger activity has slowed and stabilised over the past decade (Figure 2.3). Historically, passenger travel has increased with rising incomes. Recent trends suggest that the average daily time spent commuting has peaked and future growth in light passenger vehicle activity will likely come predominantly from population increases (BITRE and CSIRO 2008, pp. 7 8). Light commercial vehicle activity is projected to grow more than twice as fast as passenger vehicles to 2030, but will still contribute less than a quarter of the total kilometres travelled by light vehicles (Treasury and DIICCSRTE 2013). FIGURE 2.2: TRANSPORT EMISSIONS BY MODE OF TRAVEL, SELECTED YEARS, Domestic shipping Rail Domestic aviation Motorcycles Buses Trucks Light vehicles Emissions (Mt CO 2 -e) Note: Future projections are based on a no carbon price scenario. Source: Climate Change Authority calculations using results from Treasury and DIICCSRTE 2013, and Reedman and Graham 2013a

19 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE FIGURE 2.3: PASSENGER ROAD EMISSIONS, ACTIVITY AND EMISSIONS INTENSITY, FIGURE 2.4: ROAD FREIGHT EMISSIONS, ACTIVITY AND EMISSIONS INTENSITY, Activity (billion vehicle kilometres travelled (vkt)) Emissions intensity (g CO 2 -e/vkt) Emissions (MtCO 2 -e) Activity (billion tonne-kilometres (tk)) Emissions intensity (g CO 2 -e/tkm) Emissions (MtCO 2 -e) Note: Future projections under a no carbon price scenario. Activity includes motorcycles and passenger vehicles only and does not include light commercial vehicles. Source: Climate Change Authority calculations using results from Treasury and DIICCSRTE 2013 Road freight is the second-largest contributor to road transport, with trucks accounting for 20 per cent of transport emissions in 2012 (BITRE 2013b, p. 135). The road freight task is growing quickly up 42 per cent between 2002 and 2012 to 208 billion tonnekilometres (BITRE 2013b, p. 47) and is projected to increase further, to 357 billion tonne-kilometres in 2030 (see Figure 2.4). This means emissions from trucks are projected to rise much faster than those from other types of road vehicles, despite improvements in emissions intensity (Treasury and DIICCSRTE 2013). Domestic aviation activity, dominated by passenger transport, accounts for 9 per cent of transport emissions. Aviation activity increased by 80 per cent between 2001 and 2011, and is projected to approximately double from 2011 levels by 2030 (CCA 2014a, p. 275). This strong growth is largely driven by economic growth and increasing passenger preference for air travel over road or rail (BITRE 2013a and PC 2011, p. 60). Emissions from rail and domestic shipping each accounted for about 3 Mt CO 2 -e, or 3 per cent of total transport emissions in 2012 (Treasury and DIICCSRTE 2013). CONCLUSION: C.1 Transport accounts for 16 per cent of Australia s greenhouse gas emissions. Light vehicles alone contribute 10 per cent. Note: Future projections under a no carbon price scenario. Activity includes light commercial vehicles and rigid and articulated trucks. Source: Climate Change Authority calculations using results from Treasury and DIICCSRTE 2013, and BITRE OPPORTUNITIES FOR REDUCING TRANSPORT EMISSIONS Australia s growing transport demand is not unusual. The IEA projects global travel to double between 2010 and Without further policy action, global transport emissions could grow by 70 per cent by 2050, despite continuous efficiency improvements (2013b, p. 12). The Authority s 2014 Targets and Progress Review found that there are three broad ways to reduce transport emissions without diminishing living standards: increased efficiency of motorised vehicles reduced emissions intensity of fuels more efficient demand management INCREASED EFFICIENCY OF MOTORISED VEHICLES Reducing the amount of carbon-containing fuel required to transport people and freight also reduces greenhouse gases emitted that is, it improves the emissions intensity of the vehicle. It would be costly and impractical to retrofit an existing light vehicle fleet with new technologies (IEA 2012b, p. 6). Fleet improvements can be achieved effectively over time by improving the design of new vehicles. As the fleet composition changes to include more new and efficient cars, and old vehicles are retired, the average efficiency of the fleet improves.

20 20 CHAPTER REDUCED EMISSIONS INTENSITY OF FUELS The second way that transport emissions can be reduced is by switching from conventional fuels with higher emissions to alternative fuels with potentially lower emissions, such as electricity, natural gas and sustainable biofuels (for example, ethanol and biodiesel produced from crops like wheat, maize or sugar cane, or canola). The level of CO 2 emitted from the combustion of fuels depends on both their energy content and carbon content. For example, diesel has a higher energy and carbon content, and therefore higher emissions per litre, than petrol. A diesel engine, however, is more efficient than a conventional petrol engine, so its fuel consumption and CO 2 emissions are lower for each kilometre travelled. The net effect of different fuels on national emissions also depends on the upstream emissions from their production. Emissions from running a vehicle on electricity, for example, depend on how the electricity is generated. When powered by the current average Australian grid, the fully electric vehicles currently available in Australia are less emissions-intensive than the average light car, which is the most efficient class of light vehicle (Climate Change Authority calculation based on CCA 2014a; NTC 2013 and Commonwealth of Australia 2014c). Similarly, the overall, or lifecycle, emissions of biofuels can vary dramatically depending on the source of the feedstock (PC 2011, p. 7). Given the feedstocks currently used in Australia, however, biofuels generally do have lower emissions intensity than fossil-derived fuels on a lifecycle basis. Biofuel production also involves water and land use, in some cases displacing food crops. Advanced, second- and thirdgeneration biofuels such as lignocellulose use non-food resources including forestry and urban waste, but these are not yet sufficiently developed for deployment on a commercial scale (Reedman and Graham 2013a, p. 33) MORE EFFICIENT DEMAND MANAGEMENT The third way transport emissions can be reduced is by changing the way people and freight are moved, and reducing the need for movement while maintaining living standards. These changes improve the emissions intensity of travel or reduce transport demand. The potential for passenger mode shift is difficult to quantify users mode selection depends on the price and desirability of the alternative transport options available and, potentially, policies and programs that influence travel behaviour. Australia s cities are more sparsely populated than most cities of the world (DIT 2013, p. 112), which can present a challenge to broader use of public and active transport. Nevertheless, both global and national assessments (IEA 2013b, pp. 44 5; DCCEE 2010, pp ) highlight many opportunities, including: Mode shift moves passengers and freight from higher to lower emissions modes; for example, from road to public transport, walking, cycling and rail. Improvements to public transport can reduce congestion while improving travel time and reducing household transport expenses. Intelligent transport systems (ITS) use emerging communications and data systems to better manage logistics and transport use, including by reducing congestion and optimising fuel use. The IEA estimates that ITS could reduce truck fuel use by 2 10 per cent through technologies such as intelligent control of acceleration and speed, and predictive cruise control (IEA 2012a, p. 27). Urban and transport planning can help reduce travel requirements and encourage mode shift to active and public transport; for example, by locating employment and community services like schools close to communities that need them, or creating streetscapes that encourage walking rather than driving OPPORTUNITIES IN THE MEDIUM AND LONGER TERM Over the period to around 2030, technologies to improve the fuel efficiency of new conventional light vehicles offer the largest and best-value emissions reduction opportunities in the Australian transport sector. Significant improvements in light vehicle efficiency are required in a cost-effective pathway to meet the global goal to limit warming to less than 2 degrees. Conventional internal combustion engines are projected to remain the dominant propulsion system used in road vehicles to 2030, even in a 2 degree scenario (IEA 2012b, p. 10). Relative to other sectors, vehicle efficiency improvements are some of the lowest cost opportunities to reduce emissions, delivering net savings to motorists because higher vehicle purchase costs can be more than offset through lower running costs. ClimateWorks Australia (2014, pp. 4 5) identified that the most financially attractive emissions reduction opportunity across the entire economy could be fuel efficiency improvements to light vehicles with internal combustion engines, providing savings to vehicle users of $350 for each tonne of CO 2 that is not emitted (Figure 2.5).

21 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE FIGURE 2.5: OPPORTUNITIES TO REDUCE EMISSIONS IN AUSTRALIA IN Car and light commercial vehicle efficiency improvement Large articulated truck efficiency improvement Hybrid cars Electric cars 50 Cost to an investor (A$/t CO 2 -e) Power Industry Transport Buildings Forestry Agriculture Emissions reduction potential (Mt CO 2 -e) per year Source: ClimateWorks Australia 2014 Note: Costs are in 2010 Australian dollars ClimateWorks estimates that conventional light vehicle efficiency improvements could provide fuel savings of $500 per year in 2020, rising to $852 per year in 2024 (2014, p. 11). It also found that even if vehicle purchasers paid up to $2,500 per vehicle more to cover the costs of improved efficiency technologies, they would recover these costs within three years through fuel savings (2014, p. 2). This is consistent with international assessments (for example, IEA 2009) that if strong enough measures were implemented globally, the fuel consumption of new light vehicles could be halved by 2030 at low or possibly negative cost to consumers. In the longer term, light vehicle electrification and biofuels for light vehicles could deliver significant reductions (Graham et al. 2012a). Biofuels for heavy vehicles and greater use of natural gas could reduce the emissions intensity of Australia s heavy vehicle fleet (Graham et al. 2012b, p. 45). Assessing the emissions reduction potential of a large range of transport options, the Australian Low Carbon Transport Forum found that the top four options for delivering emissions improvements were all changes to light vehicles electrification, use of biofuels, fuel efficiency technologies and downsizing (Table 2.1).

22 22 CHAPTER 2 TABLE 2.1: ESTIMATED OPPORTUNITIES FOR ANNUAL EMISSIONS REDUCTIONS IN 2050 FROM TRANSPORT SECTOR OPPORTUNITIES Increased vehicle efficiency technologies Light vehicles 19.4 Trucks and buses 7.2 Aircraft 5.2 Shipping 0.7 Rail 0.9 Reduced emissions intensity of fuels Electric light vehicles 22.8** Electric trucks and buses 1.9 Light vehicle biofuels 11.8 Truck and bus biofuels 14.3 Aviation biofuels 6.2 Shipping biofuels 2.0 Rail biofuels 2.4 More efficient transport demand management Urban road pricing and other pricing incentives 3.9 Urban design 1.0 Mode shift, urban car to less emissions-intensive 1.22 mode Freight mode shift and improved logistics 3.1 ESTIMATED ANNUAL EMISSIONS REDUCTION (FULL FUEL CYCLE) IN 2050 (Mt CO 2 -e)* Note: *Emissions reduction estimates are the calculated contribution to aggregate abatement from the full fuel cycle (including upstream emissions from fuel production) if the full range of opportunities is introduced in sequence. Estimated abatement from each of the opportunities if introduced in isolation is significantly higher in many cases. **Assumes significant decarbonisation of the electricity supply, from t CO 2 /MWh in 2020 to t CO 2 /MWh in Source: Graham et al. 2012b The fact that emissions reduction opportunities from deploying more efficient technologies in conventional vehicles are both relatively low cost and important for achieving global temperature goals suggests light vehicles are a sensible place to focus Australia s current efforts to reduce emissions from the transport sector. A technology-neutral policy such as mandatory vehicle standards (see Chapter 3) will encourage both the low-cost improvements in conventional vehicle technology currently available, and the deployment of alternative vehicles over time. In some cases, regulation of a particular industry sub-sector may drive activity into other sub-sectors, thereby undermining the intended emissions reductions and other benefits. This is very unlikely in the case of light vehicle emission standards. Standards reduce vehicle operating costs (see Chapter 4), so they create little incentive for regulatory avoidance. Further, other vehicle types are generally poor substitutes for light vehicles for example, households and businesses are unlikely to switch from cars and vans to heavy duty trucks. Finally, if standards were to encourage mode shifts for example, from private to public transport this would tend to strengthen rather than undermine the emissions savings. CONCLUSION C2. In the medium term, improving the efficiency of road passenger transport using existing technologies is one of the lowest cost emissions reduction opportunities in the Australian economy. The next section provides an overview of Australia s light vehicles and how the fleet has evolved since 2005.

23 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE CHARACTERISTICS OF AUSTRALIA S LIGHT VEHICLE FLEET AND ITS USE Australia s light vehicle market consists of all road vehicles less than 3.5 tonnes (other than motorcycles) and is classified into light passenger vehicles (cars and SUVs) and light commercial vehicles (sometimes called light trucks). Australian road vehicles travelled over 211 billion kilometres in 2012, or 14,000 km on average per vehicle. Light vehicles accounted for 91 per cent of all road kilometres travelled and consumed 75 per cent of road transport fuel. Passenger vehicles were predominantly fuelled by petrol (85 per cent of fuel consumption), while half of all fuel consumed by light commercial vehicles was diesel (ABS 2013b, p. 7). Australian light vehicles emitted an average of 3.75 tonnes of greenhouse gases in 2012 (Climate Change Authority calculations based on ABS 2013a; BITRE 2013b). About one million new light vehicles are purchased in Australia each year, adding to a fleet of about 16 million vehicles. Over the five years to 2013, the fleet grew at an average annual rate of 2.4 per cent (ABS 2013a, p. 8). In 2013, the average car was 9.8 years old and the average light commercial vehicle was 11.3 years old (ABS 2013a, p. 11). The average Australian light vehicle has a lifespan of about 20 years (DCCEE 2010, p. 137) and about 4 per cent of the fleet is retired each year (ABS 2013a, p. 21). The Australian new vehicle sales market is classified into three buyer types private (that is, households), government and business. In 2013, private sales accounted for over half of new light vehicle sales, followed by 43 per cent from business and 4 per cent from governments (NTC 2014). Privately purchased vehicles have the lowest average vehicle emissions intensity, followed by business and then government. The higher emissions intensity of government vehicles may be attributable in part to purchasing policies in some jurisdictions that favour domestically produced vehicles, which have higher emissions intensities than the average new light vehicle (NTC 2014). With the end of domestic manufacturing, any remaining such policies will need to be reviewed, and fuel economy or emissions intensity could be expected to play a larger role in purchasing decisions. Between 2005 and 2013, the average emissions intensity of vehicles for each class of purchaser fell, with the largest falls in emissions coming from business purchases (22 per cent over the period), followed by government (20 per cent) and private buyers (17 per cent) (NTC 2009, 2011, 2012, 2013, 2014). Most new vehicles sold in Australia are produced overseas, with the domestic industry supplying about 10 per cent of the new vehicle fleet in The largest source of imported vehicles was Japan, which supplied about one-third of Australia s new vehicles, followed by Thailand, Europe and Republic of Korea (Figure 2.6). FIGURE 2.6: NEW ROAD VEHICLES BY COUNTRY OF ORIGIN, 2012 Europe 16% Thailand 20.1% Source: FCAI 2014 Republic of Korea 11.9% Japan 31.9% Australia 10.4% USA 3.2% Other 2.1% India 1.7% South Africa 0.8% Argentina 0.7% China 0.6% Mexico 0.6% Australia s light vehicle fleet mix has changed over the past decade, with a shift in new vehicle sales towards SUVs at the expense of larger cars and, to a lesser extent, towards smaller cars (Figure 2.8). Since 2005, the market share of larger vehicles has fallen by 14 percentage points. Over the same period, the market share of SUVs increased by 12 percentage points, and light passenger vehicles increased by 2 percentage points. Figure 2.7 shows the highest selling model for each vehicle class. FIGURE 2.7: HIGHEST SELLING MODELS IN 2013, BY VEHICLE CLASS LIGHT SMALL MEDIUM LARGE Mazda 2 Toyota Corolla Toyota Camry Holden Commodore SPORTS SUV LIGHT COMMERCIAL Toyota 86 Mazda CX5 Toyota Hilux Source: National Transport Commission 2014

24 24 CHAPTER 2 FIGURE 2.8: NEW VEHICLE SHARES BY CLASS OF LIGHT VEHICLE, % 90% 80% 70% 60% Light Small Medium Sports Light commercial vehicles All SUVs Large 50% 40% 30% 20% 10% 0% Note: Large includes large, upper large and people mover vehicles. Source: Climate Change Authority calculations using results from the National Transport Commission s carbon dioxide emissions reports for new Australian vehicles FIGURE 2.9: NEW VEHICLE AVERAGE EMISSIONS INTENSITY BY VEHICLE CLASS, Average emissions intensity (g CO 2 /km) LCVs Large All SUVs All light vehicles Sport Medium Small Light Note: Large includes large, upper large and people mover vehicles. Source: Climate Change Authority calculations using results from the National Transport Commission s carbon dioxide emissions reports for new Australian vehicles

25 LIGHT VEHICLE EMISSIONS STANDARDS FOR AUSTRALIA RESEARCH REPORT JUNE All classes of light vehicles in Australia are becoming more efficient tested average emissions intensity from new light vehicles sold in Australia fell by 3.3 per cent per year over the period , from 252 g CO 2 per km to 192 g CO 2 per km (NTC 2014, p. 16). Figure 2.9 shows that all light vehicle classes have improved their average emissions intensity since 2005, with larger vehicles making the largest improvements. The shift from large cars into SUVs over the period has lowered the emissions intensity of new light vehicles in 2013, the average SUV was 11 per cent less emissions-intensive than the average large vehicle. Despite these improvements, the Australian fleet remains more emissions-intensive than that of most other OECD countries (ICCT 2014). Overall emissions from light vehicles have been increasing but are projected to stabilise. Between 2002 and 2012, emissions increased by 11 per cent because growing light vehicle activity more than offset improvements in emissions intensity (BITRE 2013b, p. 135). Over the period to 2030, total light vehicle emissions are projected to be roughly stable (Figure 2.2). 2.4 OPPORTUNITIES TO IMPROVE EMISSIONS INTENSITY OF THE LIGHT VEHICLE FLEET Light vehicle emissions intensity can be reduced in two main ways: Changes in consumer preferences towards smaller vehicles, which have lower emissions on average. These shifts could be to a smaller vehicle within a class (for example, shifting from a large SUV to a small SUV), or between classes (for example, shifting from a large SUV to a medium-sized car). Changes in vehicles, including both vehicle and fuel efficiency technologies IMPROVING EFFICIENCY THROUGH CHANGES IN THE FLEET MIX The overall level of emissions from the Australian light vehicle fleet is affected by the composition of that fleet. Smaller vehicles are generally more fuel-efficient than larger vehicles, although there is significant variation within vehicle classes. Figure 2.9 shows recent improvements and the significant gap between the efficiency of smaller and larger new light vehicles. Increasing the proportion of smaller cars in the Australian fleet is likely to decrease emissions, even if there were no further improvements to the efficiency of individual vehicles IMPROVEMENTS IN LIGHT VEHICLE TECHNOLOGY While a shift to smaller vehicles would reduce emissions intensity, Australia s recent history shows that large improvements can be achieved even without big shifts to smaller vehicles. The Authority has calculated that technology improvements and within-class shifts have been the main driver of improvement in Australia s average new light vehicle emissions intensity between 2005 and These two factors contributed over 90 per cent (over 36 g CO 2 /km) of the fleet s average emissions intensity reductions over the period (Figure 2.10). On average, technology improvements and within-class shifts reduced average light vehicle emissions by about 5 g CO 2 /km per year from 2005 to FIGURE 2.10: DECOMPOSITION OF CHANGES IN AVERAGE NEW LIGHT VEHICLE EMISSIONS INTENSITY, Change in average emissions intensity (g CO 2 /km) Shifts between vehicle classes Technology and shifts within vehicle classes Source: Climate Change Authority calculations using national light vehicle sales, vehicle classifications and carbon dioxide emissions from the National Transport Commission s carbon dioxide emissions reports for new Australian vehicles

26 26 CHAPTER 2 There are many proven, cost-effective and currently available technologies to improve light vehicle efficiency and thereby reduce emissions intensity; for example, these include reducing vehicle weight, and implementing more efficient engines and more efficient drive trains. International research suggests that currently available technologies could achieve a 30 per cent reduction in new light vehicle emissions intensity in most countries within a decade (DIT 2011a, p. 10) and retain scope for further improvements. Figure 2.11 shows some promising vehicle technologies for improving fuel efficiency, along with an estimate of the emissions they may save. FIGURE 2.11: ESTIMATED CO 2 EMISSIONS INTENSITY REDUCTIONS FROM AVAILABLE FUEL-SAVING TECHNOLOGIES Integrated stop-start 7.5% Reducing vehicle weight by 10%: 6.5% Source: DIT 2011, p. 11 Continuously variable transmission 6% Hybrid motor assist 20 30% Six speed dual clutch % Smaller engine with a turbocharger 5-7% Six speed automatic % Camless valve actuation 5 15% Cylinder deactivation 6% The next section considers the Australian policy context in which vehicle efficiency improvements would be made. 2.5 CURRENT POLICIES AFFECTING LIGHT VEHICLES A range of policies in operation in Australia affect aggregate light vehicle emissions and costs, and therefore the costs and benefits of standards STANDARDS TO REDUCE VEHICLE AIR POLLUTION Australia, like many other countries, already has vehicle standards to reduce air pollutants. These have been in place since the early 1970s (DIRD 2014a). Australia s existing vehicle emissions standards regulate air pollutants to improve human health and air quality (DIT 2010, p. 26). Vehicles significantly contribute to levels of hydrocarbons, oxides of nitrogen, carbon monoxide and particulate matter in the air, which can adversely affect acute and chronic health conditions (DIT 2010, pp. 17, 22). Australia s existing vehicle emissions standards are set by Australian Design Rules (ADRs), which are legislative instruments under the Motor Vehicle Standards Act 1989 (Cth) (DIT 2010, p. 11). The ADRs specify the maximum level of emissions permitted by a vehicle under a specified test (DIRD 2014a). In 2011, the Commonwealth Government announced the adoption of stronger emissions standards, the first stage of which ( Euro 5 standards) will be fully implemented in 2016 (Commonwealth of Australia 2011). These standards mirror those adopted by the European Union, but on a staggered time frame POLICIES AND MEASURES ADDRESSING LIGHT VEHICLE GREENHOUSE GAS EMISSIONS The Commonwealth Government s proposed Direct Action Plan revises Australia s approach to reducing greenhouse gas emissions, including those from the transport sector. Its centrepiece is the Emissions Reduction Fund (ERF), which will purchase emissions reductions from projects and activities according to approved methodologies. The ERF could help to encourage emissions reductions from light vehicles; Chapter 3 discusses the interactions between the ERF and light vehicle emissions standards, concluding that the two can be complementary. Other measures include: Information measures Australia has compulsory fuel consumption labelling for new vehicles, with relevant information about specific vehicles available online. A fuel consumption label has been mandatory for new light vehicles since The label is model-specific and since 2003 has provided information on both fuel consumption and CO 2 emissions (DIRD 2013).

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